Out-of-court deal in Vodafone case?

In a move that is likely to soothe frayed nerves of anxious investors, the government is likely to bring to Cabinet a proposal to hammer out an out-of-court settlement with British telecom giant Vodafone on its six-year-old Rs 11,200-crore tax dispute.

Days after taking over as law minister, Kapil Sibal has endorsed the finance ministry’s proposal to settle the row, six months after the latter had first mooted the plan.

The finance ministry under Pranab Mukherjee had introduced changes in India’s tax laws in 2012 to impose a retrospective provision for tax on some types of international mergers including Vodafone’s 2007 acquisition of Hutchinson's mobile assets in India.

This was seen as a fallout of Vodafone’s five-year court battle over the Rs 11,200-crore tax demand, with the government arguing that the British firm had concluded the Hutchison deal abroad-Cayman Islands — to evade taxes.

Vodafone contested it on the basis that no tax was due in any event as the deal was concluded in Cayman Islands.

The finance ministry, it is learnt, is not averse to waiving the interest component on the tax demand, reducing Vodafone’s liabilities substantially.

“The draft Cabinet note had sought our opinion on whether this matter can be settled through conciliation. The law ministry has now given its views favouring of the proposal, although the Cabinet will take the final decision on the suitable mechanism,” a senior law ministry official said.

A top government official confirmed that the government has received a reconciliation proposal from the company.

“They (Vodafone) have written to us proposing conciliation. The government has replied saying that an appropriate authority will examine the request,” the official said, requesting anonymity.

The Parthasarathi Shome Committee, which was set up in July last year to frame a roadmap on tax avoidance proposals, has also favoured doing away with imposing taxes on corporate deals retrospectively.

The Shome panel had concluded that retrospective application of tax law should be done only in the “rarest of rare cases.”